Insurance Australia Group (IAG) - too good

08:40, 15 March 2018
· By Michael McCarthy

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On St Valentine’s Day Insurance Australia Group (IAG) delivered shareholder love with the announcement of a 24% lift in first half profit. Management also re-iterated their estimate of the annual operating margin in the 15.5% to 17.5% range. The market took off to make all-time highs for IAG above $8 per share.

IAG has grabbed a lead on its industry peers. Suncorp’s net profit fell 16%, and QBE reported a net loss after significant write downs and increased insurance losses. IAG’s engagement with Warren Buffet and the subsequent pivot to globally re-insuring risk could be a key driver, given that written premiums and revenues increased much more modestly.

IAG is now facing the same problem faced by many market darlings. One misstep and the share price could crater – and missteps are almost guaranteed in the insurance industry (declaration of personal bias – the author does not invest in insurance shares). Around $8 a share the PE ratio is close to 18x next year’s earnings and a dividend yield (last 2 dividends) of 4.5%. This makes IAG look expensive against its peers, financial stocks and the broader market.

The weekly chart (above) illustrates the steepness of the IAG share price rise. The recent stand out earnings result deserves accolades, but the sharp rise puts shareholders in danger territory. It’s harder to identify support as this is a completely new level for IAG shares. From a technical point of view the first downside support is between $7.00 and $7.37. And a pull back to a zone between $6.40 and $6.60 cannot be ruled out.

“Don’t fall in love with your position” is a well-known saying among traders. The principle could apply here. Investors in love with IAG should consider a break up – at least temporarily.

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